Single-interest insurance, also called vendor single-interest insurance, covers the interest of one or two individuals who co-own a property. This type of insurance covers a part of the entire outstanding value owed to a lender for a leased or mortgaged property. Single-interest insurance applies only to the lender or financing company’s interest.
This insurance is designed to shield the lender’s interest but not that of the borrower. In some states, lenders are allowed to pass their premiums to the borrower, requiring them to purchase the insurance to get a loan. While single-interest insurance premiums may be passed to the borrower by the lender, the borrower receives no coverage if the collateral is damaged or destroyed.
How Does it Work?
Single-interest insurance covers damages or loss of a loan’s underlying asset. And if necessary, it covers the lender’s cost of repossessing the asset. Financing companies that offer loans to borrowers with poor credit so require this type of insurance coverage to get protection against customer default. In some states, lenders are permitted to pass over their insurance premiums to the borrower.
Single-Interest Insurance Benefits
The majority of single-interest policies cover the lender’s interest in cars and other high-value personal property like watercraft and boats. Generally, single-interest insurance policies offer gap coverage to lenders for the differences between the asset’s value and the principal outstanding loan.
Some lenders may opt for blanket coverage, which offers comprehensive coverage for all their customer loan portfolios. Instead of tracking and following up on each policy, blanket coverage allows lenders to lessen their administrative costs.
What Single Interest Insurance Covers
There are quite several events single interest insurance covers; some of these events include:
- Protection against theft of assets that may be stolen or damaged.
- Protection against skip accounts to reimburse the cost of tracking down the default borrowers.
- Repossession coverage to outweigh the expense and damages sustained during the repossession process.
- Lien coverage to cover omissions and errors on the title paperwork.
What It Doesn’t Cover
Single-interest insurance policies only cover the specific financial interests of the insured individual in a property or asset. It may have specific limitations or exclusions on the policy, and these exclusions include:
- Personal Injuries: This insurance does not cover liability claims that may arise from the use of the asset or property.
- Wear and tear: Policies do not cover damages resulting from normal wear and tear or maintenance issues that are the property owner’s responsibility.
- War or Terrorism: Policies may not cover losses or damages due to terrorism, acts of war, or other events.
- Uninsured Perils: This insurance may not cover damages or losses due to perils like floods and earthquakes that are not listed in the policy. These policies, however, may be purchased as additional coverage to your policy.
Moreover, single-interest insurance covers only the lender or mortgages for damages and losses to the property with loans or leases.
Do I Need Single Interest Insurance?
This insurance is generally taken by lenders who offer high-value assets like boats, cars, or home financing when a borrower does not have any insured property. It protects the financial interest of the lender if the asset gets destroyed, damaged, or stolen. Keep in mind that this insurance benefits only the lender and does not offer any form of coverage to the borrower.
How is Single-Interest Policy Paid For?
As previously stated, some states allow lenders to pass on their premiums to borrowers. To reduce the lender’s expenses, it involves charging borrowers a small premium at the time of their loan application. However, lenders can also decide to pay their premiums based on the outstanding monthly amount of the portfolio’s loan balance. Also, lenders can pay a one-time premium on this insurance when the loan is originated.
Why do Lenders Buy Single-Interest Insurance?
Lenders face rising risks from car loan charge-offs due to the increasing inflation costs and economic uncertainty. These days, borrowers have a greater ability to manage their car insurance policies through online options, which makes it a bad thing for financial organizations. This freedom borrowers have come with a greater risk of errors through monetary deficiency.
However, lenders are more responsible for ensuring the borrower abides by the loan agreement. And It has proper insurance coverage to shield the bank’s interest in the provided collateral. Unfortunately, borrowers sometimes do not obey the requirements of their loan agreement. This can put the lender at a greater risk of losing money if the car gets stolen or damaged due to an accident.